2015–2016

Social Capital and CFO Careers: A Global Perspective

John Barrios, Assistant Professor of Accounting

Summary: This study aims to examine the role of social networks in the development of a CFO’s career. Using a detailed data set on the career and educational histories of CFOs and social network analysis, we plan to answer the following questions. How do CFO networks develop over time? What are the determinants of changes in the network and does the network structure ultimately influence their long-term career outcomes? We plan to further contribute to the literature and exploit international variation in institutions and cultural dimensions to examine how these attributes can differentially effect network formation and the ultimate career outcome of CFOs. Finally, we examine the costs and benefits of social CFOs and CFO switching for firms. In doing so, this study provides insight on the individuals who hold this prominent position in the modern corporation.

Financial and Real Effects of Bank Credit Expansion in China

Lin William Cong, Assistant Professor of Finance
Jacopo Ponticelli, Assistant Professor of Finance and Cohen and Keenoy Scholar

Summary: Frictions in the banking sector can affect banks’ lending behavior and firm ability to seize new investment opportunities. In this proposal we outline three research projects to investigate how changes in the availability of funds for Chinese banks affect access to credit, investment, and productivity of Chinese firms. Our focus will be, in particular, on small and medium enterprises, which traditionally struggle to obtain sufficient credit from large state-owned banks.

Well Confidentiality Laws and Oil and Gas Investment

Thomas Covert, Assistant Professor of Economics

Summary: Oil and gas regulators incentivize the development of unexplored resources through the provision of temporary information monopolies, under so-called "well confidentiality" laws. These laws allow firms to maintain secrecy about the results of their initial exploration activities, which they can exploit during subsequent land acquisition campaigns. I will study how these laws affect the efficiency of investment behavior and the division of surplus from this investment between firms and landowners. Using variation across US states and time in the kind of investments these laws cover and the period of secrecy they allow, I will measure the effect of secrecy on investment effort and outcomes. Based on these estimates, I will explore the costs, benefits, and distributional consequences of well confidentiality laws and consider the broader role of secrecy in incentivizing the development of socially valuable knowledge.

Improving the Outcomes of SSI Children through Information

Rebecca Dizon-Ross, Assistant Professor of Economics and Charles E. Merrill Faculty Scholar

Summary: Supplemental Security Income (SSI) provides cash payments to the families of 1.3 million low-income disabled children at risk for poor life outcomes. Qualitative evidence indicates that SSI families are unaware of the high likelihood of removal from SSI at age 18 and may underinvest in the human capital of their children. We propose a randomized controlled trial to estimate the effects of informing SSI children and their families of the likelihood of removal from SSI at age 18 on their education, employment, and criminal outcomes. Working with the Social Security Administration, we will provide randomly selected SSI households with information on the likelihood of removal at 18, and evaluate the effects on parent and child behavior and child outcomes. This research will inform public policy affecting SSI children, who constitute a large subset of the disadvantaged U.S. child population, and increase the effectiveness of public institutions in improving their outcomes.

Promoting Youth Employment in Developing Countries: Evidence from Online Experiments

Rebecca Dizon-Ross, Assistant Professor of Economics and Charles E. Merrill Faculty Scholar

Summary: The project aims to understand the drivers of youth unemployment and test potential policies to decrease it. The project is in collaboration with a non-profit organization that runs online job search portals in several Arab countries, where youth unemployment is especially high. The organization’s online format gives us a unique opportunity to design and implement tailored interventions that test specific hypothesized barriers to youth employment, e.g., adding a website features whereby users can set themselves deadlines to complete applications, based on the hypothesis that procrastination inhibits job search. During the first phase of the project, we will analyze the organization’s rich online search data to identify likely barriers to successful job matching, such as procrastination and misinformation about private sector job opportunities. We will then design interventions to try to address these barriers. During the second phase, we will perform a randomized experiment evaluating the interventions designed in Phase 1.

Risk Management in the Cross-Section of Debt Contracts

John Gallemore, Assistant Professor of Accounting and Harry W. Kirchheimer Faculty Scholar

Summary: This project seeks to identify differences in the financial contracting process across different loan products. For term loans, funds change hands at initiation. As a result, lenders are primarily concerned with credit risk (probability of default and loss given default). On the other hand, lines of credit (also referred to as revolvers) provide borrowers with the option to draw down funds over the life of the loan. While credit risk is important once funds have been transferred to the borrower, the lender’s liquidity risk—the risk that the lender will not have sufficient funds to fulfill the lending obligations—factors into the contracting process for lines of credit. We seek to identify the characteristics of the contracting process that serve the purpose of assessing and managing liquidity risk. In doing so, we contribute by enhancing the literature’s nascent understanding on the design of covenants for different types of loans and the role of renegotiations in debt contracting.

Social Structure of Governments and Firms

Tarek Hassan, Associate Professor of Finance and Economics

Summary: to be announced.

Understanding the Determinants of Retail Price Variation

Günter Hitsch, Professor of Marketing

Summary: In prior work we documented a large degree of price variation for identical products across retail stores in the U.S. that persists even within small geographic areas. In this project we first extend our prior analysis to describe how stores differ in their overall price and promotion policies and in the assortments that are offered. The central contribution of this work will be to understand how differences in price and promotion levels can be explained as the result of differences in consumer demand across stores. We estimate store-level demand systems for all products carried by the stores in our sample using regularization and shrinkage methods developed in the recent statistics and machine learning literatures. Based on these demand estimates and a new data set on wholesale prices and promotional allowances we predict the optimal prices that a profit-maximizing retailer would set and then test if the observed prices are similar to the predicted prices. Finally, we predict the elasticity of overall store-level demand based on a household-level store choice model that—using modern regularization methods—is able to handle a large number of possible store-choice predictors, in particular interactions of product-level prices and promotions with household level characteristics.

Causes and Consequences of Debt and Default: Evidence from 3 Million Credit Reports

Neale Mahoney, Assistant Professor of Economics

Summary: The recent financial crisis has placed increased focus on consumer debt and consumer financial products. In this project, we build a new micro-dataset on consumer debt for a representative panel of 3 million U.S. accounts over 2000—2015. We aim to use these data for two projects. Project #1 studies “debt traps”—the idea that there could be vicious cycles of debt, with high debt levels leading to even higher debt levels and eventually default. We plan to quantitatively address the importance of this phenomenon and examine whether policy interventions—such as the CARD Act’s restriction on lending to young adults—can “nip these cycles in the bud.” Project #2 studies the “scarring” effects of negative credit market outcomes. The financial crisis has left many individuals with black marks on their credit reports, such as bankruptcies and foreclosures, potentially reducing credit access to these individuals, and slowing the pace of the economic recovery. This project aims to study the impact of these black marks using the sharp removal of bankruptcy flags at seven and 10 years after filing.

Monetary Transmission: Models and Micro Data

Joseph S. Vavra, Assistant Professor of Economics
Thomas Winberry, Assistant Professor of Economics

Summary: to be announced.

The Dynamics of Capital and Labor Misallocation in the United States

Thomas Winberry, Assistant Professor of Economics

Summary: It is well-documented that firms vary tremendously in their productivity, implying that the allocation of capital and labor across firms is crucial in determining aggregate outcomes. In this project, we ask whether changes in this allocation over time are important for understanding aggregate business cycles in the United States. At a given point in time, we will measure the quality of the allocation of resources using the reduced-form measure of "misallocation" in Hsieh & Klenow (2009). We will then track the dynamics of this misallocation over time, and use this measurement to discipline models of the business cycle. Which models are qualitatively consistent with the patterns we find in the data? Did tightened borrowing constraints worsen the allocation of resources in the recent crisis? How does monetary policy affect the allocation? Are recessions "cleaning", times when the allocation improves, or "sullying", times when the opposite occurs?

Signaling with Sales, not for Sales: Evidence from Consumer Products Acquisitions

Thomas Wollman, Assistant Professor of Economics

Summary: In many industries, startups drive product innovation but cannot produce and market large quantities as cheaply as established firms. Thus, established firms find it profitable to acquire the set of startups that face high demand at low prices. In cases like the $170 billion non‐alcoholic domestic beverage industry, this innovate‐and‐be‐acquired cycle accounts for virtually all successful new product introductions. However, entrepreneurs often have private information about the type of demand their startup’s products face. When price is unobservable due to, for example, poor reporting, entrepreneurs find it difficult to communicate this information in a straightforward way. In this paper, I show how entrepreneurs can use pricing and advertising to send a costly signal to potential acquirers and reveal their type of demand. Then, using an original dataset that combines retail scanner data with a list of recent mergers and acquisitions in the consumer products industry, I will explore whether the data is consistent with this behavior. I will test whether startup firms that are acquired cut price, increase advertising, and consequently increase quantity in the period leading up to the acquisition announcement. I will also test whether, following the announcement, they cease or reverse this behavior.

Youth Sports, Academic Achievement, and Labor Market Success

Seth Zimmerman, Assistant Professor of Economics and Richard N. Rosett Faculty Fellow

Summary: Recent research indicates that non-cognitive skill development is a key determinant of the long-run educational and earnings effects of many in-school interventions. This project studies the academic and labor market effects of a type of in-school programming frequently credited with developing students’ grit, leadership, and teamwork: youth sports. We use a novel link between proprietary data on high school sports participation and administrative records of educational and labor market outcomes for the population of Texas public high school students to examine whether and how students benefit from a) mentoring relationships formed with sports coaches, b) interactions with peers on sports teams, and c) sports participation as opposed to non-participation. We employ quasi-experimental methods based on player and coach movement across schools to identify the determinants of long-run academic and labor market success. We also use records of movement across firms to understand how players benefit from social ties formed through sports participation once they have entered the labor force.

Stimulating Housing Markets

Eric Zwick, Assistant Professor of Finance

Summary: While a large literature examines the effect of fiscal stimulus programs in general, few examine policies that directly target the residential housing market. In this paper, we use the First-Time Homebuyer Credit, a temporary tax credit targeted towards marginal homebuyers, and a difference-in-differences research design to ask how do temporary subsidies affect homebuying decisions and the housing market more broadly? We combine data from administrative tax records with transaction deeds data to measure program exposure, estimate the effect of the policy, and explore the mechanism of the observed response in detail.

We present four main findings. First, the policy proved effective at spurring home sales. We estimate the FTHC raised home sales during the policy period by 163 to 224 thousand within sample and 397 to 546 thousand nationally. Second, we find little evidence that the surge in home sales induced by the credit reversed immediately following the policy period. Instead, demand appears to come from several years in the future. Third, the policy response came primarily in the form of existing home sales, implying the direct stimulative effects of the program were small ($4.5 to $5.2 billion). Fourth, we present evidence that the program likely accelerated the process of reallocation from low-value sellers to high-value buyers, and the health of the housing market, as reflected in house prices, improved accordingly. A back-of-the-envelope calculation suggests the consumption response to the increase in house prices was much larger than the policy’s direct stimulus effect.